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Revealed cardinal preference

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  • Sákovics, József

Abstract

I prove that as long as we allow the marginal utility for money (lambda) to vary between purchases (similarly to the budget) then the quasi-linear and the ordinal budget-constrained models rationalize the same data. However, we know that lambda is approximately constant. I provide a simple constructive proof for the necessary and sufficient condition for the constant lambda rationalization, which I argue should replace the Generalized Axiom of Revealed Preference in empirical studies of consumer behavior. 'Go Cardinals!' It is the minimal requirement of any scientifi c theory that it is consistent with the data it is trying to explain. In the case of (Hicksian) consumer theory it was revealed preference -introduced by Samuelson (1938,1948) - that provided an empirical test to satisfy this need. At that time most of economic reasoning was done in terms of a competitive general equilibrium, a concept abstract enough so that it can be built on the ordinal preferences over baskets of goods - even if the extremely specialized ones of Arrow and Debreu. However, starting in the sixties, economics has moved beyond the 'invisible hand' explanation of how -even competitive- markets operate. A seemingly unavoidable step of this 'revolution' was that ever since, most economic research has been carried out in a partial equilibrium context. Now, the partial equilibrium approach does not mean that the rest of the markets are ignored, rather that they are held constant. In other words, there is a special commodity -call it money - that reflects the trade-offs of moving purchasing power across markets. As a result, the basic building block of consumer behavior in partial equilibrium is no longer the consumer's preferences over goods, rather her valuation of them, in terms of money. This new paradigm necessitates a new theory of revealed preference.

Suggested Citation

  • Sákovics, József, 2012. "Revealed cardinal preference," SIRE Discussion Papers 2012-02, Scottish Institute for Research in Economics (SIRE).
  • Handle: RePEc:edn:sirdps:305
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    File URL: http://hdl.handle.net/10943/305
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    References listed on IDEAS

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    1. Syngjoo Choi & Shachar Kariv & Wieland M?ller & Dan Silverman, 2014. "Who Is (More) Rational?," American Economic Review, American Economic Association, vol. 104(6), pages 1518-1550, June.
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    5. Douglas M. Gale & Shachar Kariv & Syngjoo Choi & Raymond Fisman, 2007. "Revealing Preferences Graphically: An Old Method Gets a New Tool Kit," American Economic Review, American Economic Association, vol. 97(2), pages 153-158, May.
    6. Afriat, Sidney N, 1972. "Efficiency Estimation of Production Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(3), pages 568-598, October.
    7. Federico Echenique & Sangmok Lee & Matthew Shum, 2011. "The Money Pump as a Measure of Revealed Preference Violations," Journal of Political Economy, University of Chicago Press, vol. 119(6), pages 1201-1223.
    8. Marcel Richter & Kam-Chau Wong, 2005. "Infinite inequality systems and cardinal revelations," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 26(4), pages 947-971, November.
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    Cited by:

    1. Forges, Françoise & Iehlé, Vincent, 2014. "Afriat’s theorem for indivisible goods," Journal of Mathematical Economics, Elsevier, vol. 54(C), pages 1-6.

    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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